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Chapter Describe the formal procedures associated with issuing long-term debt Identify various types of bond issues Describe the accounting valuation for bonds at date of issuance Apply the methods of bond discount and premium amortization Describe the accounting for the extinguishment of debt Explain the accounting for long-term notes payable Explain the reporting of off-balance-sheet financing arrangements Indicate how to present and analyze long-term debt. Learning Objectives

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Chapter 14-5 Issuing Bonds LO 1 Describe the formal procedures associated with issuing long-term debt. Bond contract known as a bond indenture. Represents a promise to pay: (1) sum of money at designated maturity date, plus (2) periodic interest at a specified rate on the maturity amount (face value). Paper certificate, typically a $1,000 face value. Interest payments usually made semiannually. Purpose is to borrow when the amount of capital needed is too large for one lender to supply.

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Chapter 14-8 Valuation of Bonds – Discount and Premium LO 3 Describe the accounting valuation for bonds at date of issuance. Between the time the company sets the terms and the time it issues the bonds, the market conditions and the financial position of the issuing corporation may change significantly. Such changes affect the marketability of the bonds and thus their selling price. The investment community values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal.

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Chapter 14-9 Interest Rates Stated, coupon, or nominal rate = The interest rate written in the terms of the bond indenture. Market rate or effective yield = rate that provides an acceptable return on an investment commensurate with the issuer’s risk characteristics. Rate of interest actually earned by the bondholders. Valuation of Bonds – Discount and Premium LO 3 Describe the accounting valuation for bonds at date of issuance.

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Chapter How do you calculate the amount of interest that is actually paid to the bondholder each period? (Stated rate x Face Value of the bond) How do you calculate the amount of interest that is actually recorded as interest expense by the issuer of the bonds? (Market rate x Carrying Value of the bond) Valuation of Bonds – Discount and Premium LO 3 Describe the accounting valuation for bonds at date of issuance. Look Page 692 & 693

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Chapter Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2011, with a stated interest rate of 8%. Interest paid annually on Dec. 31. Calculate the issue price of the bonds, market interest rate of 8%. LO 3 Describe the accounting valuation for bonds at date of issuance. Market Rate 8% (PV for 3 periods at 8%) Bonds Issued at Par Solution on notes page

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Chapter Illustration: Three year bonds are issued at face value of $100,000 on Jan. 1, 2011, a stated interest rate of 8%, and market rate of 8%. Bonds Issued at Par LO 3 Describe the accounting valuation for bonds at date of issuance.